Running the Numbers: Climate Change funding Commitments

On a day on which Malcolm Turnbull, the leader of the opposition, is wondering what his numbers will be in the Senate to support the Carbon Pollution Reduction Scheme (CPRS – the Australian Emissions Trading Scheme), I find myself considering a whole set of completely different numbers, but numbers which are likely much more important to determining the extent to which climate change is addressed.

On my desktop, I have two web pages open. One is a good article in the New York Times about the U.S. Government deficit and interest payment position. The other is the second version of McKinsey’s greenhouse gas abatement cost curve.

Both contain some fascinating numbers. Both are worth thinking about and provide an interesting point of reference for ambitions to address climate change during the critical twelve months to come, during which one might expect both political and implementation agreements for a global climate accord to be agreed.

Both items ask the question: how are we going to pay?

Both issues imply both an inter-generational and intra-generatianal equity aspect: our generation has been living beyond our means either financially or environmentally, and that mechanisms must be developed to manage the payment of that debt and debt-servicing among ourselves, and between us and a future generation.

The NYT article reminds us of the current status of the US deficit: $12 trillion. It is such a staggeringly large number that it hardly seems conceivable. It is an abstract concept to most.

US Treasury results point to a $1.4 trillion deficit in FY09 alone – an estimated 10% of US GDP.

The IEA Energy Technology Perspectives suggests an investment of $1 trillion per annum out to 2050 is required in the development and deployment of 17 key energy technologies to meet a 450 ppm greenhouse gas emissions target. McKinsey estimates incremental investment costs of $445 bn in 2015 to $1.14 trillion in 2030.

That number is about 1.1% of global GDP.

In a recent report on technology transfer financing under the UNFCCC, ECN quotes a Project Catalyst report which estimates the total international North-South funding flow requirement under an international climate agreement to be to the tune of $76-111 bn.

This estimate tallies with the EU’s estimate of Euro 100 billion – of which the EU expects Euro 22-50 billion should be publicly-funded, with the balance privately financed through the carbon markets. The EU further expects the ‘fair’ share of the EU to the public funding to be between Euro 2-15 billion per annum. The EU agreed finally on a sum of Euro 3-5 billion per year for the next three years for international public climate finance.

The GDP of the EU 25 is $16.5 trillion. The EU commitment is therefore equivalent to approximately two-one hundredths of one percent of GDP.

The GDP of the US is 14.2 trillion. Might we expect, following the EU lead, the US to commit between Euro 2.5-4.5 billion per annum approximately?

It is hard to see how, at this rate, commitments will reach any more than $15 billion per annum from Annex 1 countries in aggregate for international public climate finance.

Now consider the climate change invesment funding requirement in the context of US debt interest payment, as the NYT reports:

Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury’s average cost of borrowing would cost American taxpayers an extra $80 billion this year — about equal to the combined budgets of the Department of Energy and the Department of Education.

But that could seem like a relatively modest pinch. Alan Levenson, chief economist at T. Rowe Price, estimated that the Treasury’s tab for debt service this year would have been $221 billion higher if it had faced the same interest rates as it did last year.

On the one hand, the US figures make the climate agreement seem manageable: we can now relate in some capacity what the ‘billions’ and ‘trillions’ mean – the debt and expenditure figures provide a familiarity and detatched comfort sufficient for us to be able to consider the climate change investment requirements as potentially something feasible – as perhaps something that is not totally outlandish.

On the other hand, the US debt figures remind us of the difficulties that will be faced in securing an appropriate investment in low-emissions infrastructure, and in North-South transfers. Governments in the West are suffering reduced income receipts due to unemployment, and are carrying substantial deficits. Their ability to continue to fund additional infrastructure publicly going forward will for some time be constrained. In a scenario in which the Bureau of Labour Statistics point to official unemployment of over 10%, and the NYT reporting braader unemployment rates in the US are more akin to 17.5%, prospects for substantial expansion of international funding commitments from the US is bleak. Without that strong lead from the US, others are unlikley to act.

These deficits may preclude the investment required for future generations – whether it be in terms of sustainable health or retirement programmes for the US, or low-emissions technology application in developing countries.

However, in the context of the required climate change funding being equivalent to just a tiny shift in debt-servicing interest rates of the US alone, the ability to generate the required investment is surely imaginable.